A Second Look: Defense

Monday, January 29, 2007
The Associated Press reported that the Street gave a motley review of defense titans Lockheed Martin Corp.'s and Northrop Grumman Corp.'s outlook for the year, a day after both companies posted higher fourth-quarter earnings. Market observers warned that despite solid growth by Lockheed and Northrop in 2006, performance expectations for 2007 appear to be uncertain due to ambiguous budget requests.

The Defense Department submits its fiscal 2008 budget request to Congress for approval next month. Initial estimates suggest the defense budget could reach more than $600 billion for 2008 in addition to the $100 billion supplemental request for war spending for the remainder of 2007.

CIBC World Markets Corp. research analysts noted that Los Angeles-based Northrop, considered to be one of the U.S. Navy's top ship providers, is expected to see a cutback in shipbuilding as the Navy requested four ships -- rather than the six initially planned for in 2006.

There has also been speculation that the Pentagon may issue cutbacks in missile defense and space tracking and surveillance systems. Also facing Northrop has been a slow growth rate, compared to its competitors, due to damage from Hurricanes Katrina and Rita to the company's shipbuilding operations.

Shares of Northrop grew modestly by 13 percent in 2006 compared to rival Lockheed Martin which surged 45 percent for the year based on earnings growth. Lockheed shares dropped 93 cents to $96.51 in afternoon trading on the New York Stock Exchange, while Northrop shares dropped 78 cents to $70.52 on the Exchange. Source: AP

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